One of the deputy governors of the Bank of England has cut short his tenure to become the new City watchdog, in a move that lawyers said signals an end to banker bashing.

George Osborne personally intervened to convince Andrew Bailey to become chief executive of the Financial Conduct Authority, which has been without a permanent head since the chancellor forced out Martin Wheatley last summer.

The chancellor said Bailey – who was approached in recent weeks about the role – would be “tough but fair” in City dealings . But City lawyers said it heralded a new approach.

John Ahern, partner at law firm Jones Day, agreed: “Andrew is more centrist than his predecessor, Tracey McDermott, so ‘bank bashing’ will likely give way to constructive regulatory oversight of the industry on his watch.”

The chancellor revealed earlier this month that McDermott – who was considered the frontrunner for the role – did not want the job full-time in a move that caused confusion about the recruitment process for one of the highest profile roles in the City.

The FCA – created by the coalition government – is responsible for clamping down on bad behaviour and McDermott had handed out a string of record fines for rigging foreign exchange and Libor markets.

The chancellor said: “We have cast the net far and wide for this crucial appointment and, having led the Bank of England’s response to the financial crisis, Andrew is simply the most respected, most experienced and most qualified person in the world to do the job.

“The government is determined that the financial sector operates to the highest standards. Anyone who has dealt with Andrew knows he will be tough but fair, and understands the flaws and merits of the sector better than anyone.”

Osborne has had to fight off criticism that he encouraged the FCA at the end of last year to abandon a review into banking culture. Mark Carney, governor of the Bank of England, stepped into that row on Tuesday by admitting that Threadneedle Street did not know the review was being dropped even though Bailey already sits on the FCA board.

“I have every confidence the new CEO of the FCA will be addressing this issue,” Carney told MPs on the Treasury select committee.

John Mann, a Labour MP on the committee, said: “This appointment shows that the Treasury and George Osborne have decided to downgrade consumer interests inside the FCA culminating in the sideways move of Andrew Bailey.”

Bailey – who ran the Bank’s Prudential Regulation Authority (PRA) – said it was an honour to have been asked to take on the role.

He said: “Recent developments have shown that the most pressing issue in the system right now is the need for stable leadership at the FCA … After a lot of thought I have decided to move and do all that I can to make the FCA effective and successful. My intention is to move once a successor is found for the PRA, and while I will of course not be involved in that process, it matters greatly to me that it provides for the successful future of the PRA.”

His salary was not disclosed although Wheatley’s was £460,000. Carney said Bailey was unlikely to leave for up to six months while a successor was found. Carney said there would be an open competition but that he had assembled strong team.

Rob Moulton, a partner at law firm Ashurst, said the appointment of Bailey was consistent with a more conciliatory approach.

“Placing a Bank of England insider at the heart of the FCA shows the triumph of old-fashioned regulation, such as building relationships with bank CEOs, over the more recent headline-grabbing fines and disciplinary action. Andrew’s first challenge will be to reorganise and raise morale at the FCA, which has suffered a torrid few months,” said Moulton.

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said Bailey had a tough task ahead of him. “The FCA does not just need to be a strong regulator, it also needs the support of the industry if it is to continue to make the changes needed to restore trust in financial services,” said Izza.

The FCA also announced the appointment of a number of new non-executive directors, including the former Treasury minister Ruth Kelly, and Lady Hogg, the former head of the prime minister’s policy unit from 1990 to 1995.